Corporate Tax

Hold Elizabeth Warren’s confusion out of the corporate tax dialogue

As the Democrats search for ways to pay off a gigantic $ 3.5 trillion budget, they have begun tossing fancy proposals on the wall in the hopes that something will stick. The latest is a revival of Senator Elizabeth Warren’s proposal for a “minimum book tax” targeting large corporations.

Despite the label of a “minimum tax,” the latest proposal from Warren’s mad scientist factory for poor tax policies would apply to all companies with sales above $ 100 million, regardless of their traditional corporate income tax liability. Each affected company would have to pay a 7 percent tax on revenues over 100 million US dollars, calculated on the so-called “book value”. Book value refers to the income companies report to their shareholders, which may differ from the amount on which they pay corporation tax.

Taxing book profits is a popular idea in progressive circles. They claim that companies use one form of accounting to report profits to the Internal Revenue Service (IRS) and another to report to shareholders so that they can show shareholders large profits but no taxable income to the IRS can.

This claim would deserve a fact-checking rating of “half true” at best. It is true that companies often report book income other than taxable income, but that is not shameful and the IRS is not being fooled. Rather, this is because accounting for the benefit of shareholders and accounting for taxable income serve different purposes.

“Book receipts” are reported to shareholders to demonstrate a company’s fiscal health. It is intended to give shareholders a sense of how the company is developing and what its prospects are. Taxable income, on the other hand, is the income of a corporation after taking into account various deductions, credits and exemptions that are intentionally included in the tax law. Any differences between the two reflect political choices and not deception on the part of the company.

Corporate Income Tax Act doesn’t just deduct a prorated amount of money from each company based solely on its earnings. Instead, it takes into account costs such as wages paid to workers, enables losses to be offset over time, and includes credits and deductions that policymakers seek to encourage certain forms of productive economic activity, from investing in equipment to research.

The federal tax law is far from perfect, but these provisions exist for good reason: otherwise, companies could end up paying more taxes than their actual net profits. Whatever one thinks of the fairness of a particular rate or regulation, almost everyone can agree that companies shouldn’t pay more taxes than they actually deserve.

Even Warren’s Democrats have given the existence of some loans to encourage certain activities. When President Biden proposed a “minimum tax” at the beginning of the year, this still included credits for research and development as well as for renewable energies.

That’s because while Democrats can claim they hate it when companies use tax code deductions and credits to reduce their tax bill, in general, they can’t fault the deductions and credits themselves. Politically, it is far more beneficial to use rhetorical tricks to demand a “minimum tax” than to actually eliminate deductions and credits that they believe are bad policies.

Taxpayers shouldn’t let Democrats get away with these rhetorical tricks. A minimum tax on book income runs counter to a decade-long bipartisan agreement on proper tax policies, and Congress would be wise to do with it what they did with most of Warren’s other crazy ideas: nothing.

Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.

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